Seven Reasons Facebook Should Stay Home

In the Hutong
Upgrading to Firefox 4
1730 hrs.

Judging by the number of calls I have taken on the subject in the past four days, the rumors of Facebook’s imminent arrival in China are reaching a crescendo. And while the lack of an emphatic denial from Facebook’s appointed spokespeople does not count as a confirmation of such plans, it is a fair bet that the company is considering it.

I think coming to China would be a bad move for the company, and I am not alone. Imagethief Will Moss has explained that operating in China by China’s rules puts Facebook’s global reputation, and thus the goodwill of its worldwide users, at risk. Gady Epstein at Forbes argues that government suspicion of Facebook’s ulterior motives will stand in the way. And Bill Bishop at Digicha thinks Facebook’s own uncoordinated communications will undermine the entire effort.

To me, the core problem with a Facebook venture in China is a weak business case: the risks are high, the costs would be significant, and the upside declines daily.  Avoiding the moral issue for now (not ignoring it, just saving it for a separate post), here are the reasons I think Facebook’s board should just say “no” to China.

1. Facebook is too late. There was a time when Facebook had an opportunity to be something amazing in China. My best guess puts that window somewhere between January 2007 and June 2008. Chinese users of the English Facebook site were on the upswing, the government had not blocked the service, and there was some real buzz about the company in the market.

But Facebook, busy with other things, decided that doing a Chinese site would fall into the “too-hard” pile. The moment passed, and local companies have had three years to to clone, localize, and improve on Facebook’s offering, then scale up, consolidate, and in Renren’s case, go public. There is no virgin territory for Facebook in China, no blue ocean, just the prospect of having to slug it out with a bunch of wily local tigers sitting atop the hill using Facebook’s own tactics and sharpening their claws.

Worse, Facebook is contemplating market entry at a time when, according to this presentation from RedTech China, Facebook-style social networking sites are experiencing a slowing in growth, something also suggested by Renren’s quiet restatement of its Q1 user growth numbers.

2. China’s users have been there, done that. As noted above, Chinese users have seen Facebook before, and they have seen it imitated in a dozen different ways. Unless Facebook is planning to offer something radically different, more enticing to Chinese users, and completely impossible for others to imitate, users will come, they will play, they will yawn, and they will go back to what they were doing.

Facebook confronts a distateful choice in China: stick with the company’s trademark formula, hoping to win on name recognition alone, or abandon its core essence in search of differentiation. Doing the former risks getting lumped into the rest of China’s social-networking has-beens, while the latter would deprive the company use of its most important asset – its code – and force it to start from scratch in China while the competition leaped ahead.

3. Competition is brutal, and it is not just RenRen. And speaking of competition, Facebook is coming into a social media environment that is not limited to Facebook lookalikes. The company must also fight chat giant QQ, Sina’s booming Weibo microblogging service, and online forums or BBSs, all of which have either mass, momentum, or both.

Weibo is the uber-threat, with Sina.com prepared to use its deep-pockets to help build its user base far beyond its current 100 million while adding features to take the service far beyond a simple Twitter clone. By the time Facebook launches in China, it may find itself without a market.

4. Facebook was not invented here. As I argued at some length in Advertising Age early last year, online services are born and grow in a specific cultural context. Sometimes those services travel well. Often they do not, and in the case of services that are transplanted from the US to China, successful transplants are all but unknown.

The most important reason those transplants fail is that they apply the formula they used for success in the United States to an online population that uses the internet in subtly but importantly different ways. Local engineers and entrepreneurs, themselves products of the local culture, can see with startling clarity where those gaps lie, and how to exploit them.

There is no reason to believe that Facebook will be any different. And before you suggest that somehow a local partner like Baidu would ameliorate that disadvantage, see below.

5. Welcome to the Post-Foreign China. There was a time when being a foreign company bestowed a cachet that meant ready acceptance among consumers and helpful policies from government. The helpful policies are gone, replaced with a mixture of suspicion, petty harassment, and a belief that foreigners have precious little to offer China anymore; the ready consumer acceptance – in the internet sector specifically – is gone, worn down by a parade of global brands that never lived up to their promise.

Today, being a foreign internet company is a liability, and Facebook will meet widespread doubt, skepticism, derision, and hostility when it launches in China. Many netizens will be pulling for Facebook to fail, will exert themselves to make that failure happen, and will find ready accomplices in competitors and their legions of fanboys/girls.

6. Don’t count on Baidu to help much. Baidu will be the best possible partner for Facebook, but that does not mean that the Chinese search giant will make Facebook’s China problems go away. Baidu has no experience running a successful social networking site, so they will be learning along with Facebook. Facebook will rely on Baidu for air cover with the government, but Baidu has its own mounting issues with the government, ranging from legal action over IPR violations to the recent appearance of two government-sponsored competitors for Baidu’s search business.

If head Facebooker Mark Zuckerberg expects Baidu to focus on the success of Facebook China, he may want to consider the company’s full plate: Baidu has to defend its search position against its own government, handle a new paid music site, build out its efforts in online video and e-commerce ventures against formidable competitors, and create a mobile operating system to beat Android, iPhone, and a dozen other competitors. That does not leave a lot of executive attention or engineering resources for Facebook China.

The Baidu partnership will be helpful, and it will look great to The Street, but it is not going to make Facebook China a success. That will devolve on on Facebook itself.

7. China is mobile, and Facebook does not do mobile very well. I use the Facebook mobile software on two Apple devices, and I am being kind when I say the experience is underwhelming. Facebook still has not figured out how to make an elegant transition to mobile, but China is maybe three years away from more users accessing the Internet on a mobile device than on a PC. Weibo on mobile is not great, but its experience translates much more readily to a mobile screen, and it is easier and more intuitive to use the Weibo app than the Facebook app. Unless Facebook can figure out the formula for success on mobile – including figuring out how to integrate ads – they are going to get creamed in China.

Come if you must

In order for its efforts in China not to backfire on it – much less to be considered a success – Facebook has to proactively address each of these issues, and deal with the implicit opposition of Chinese regulators and U.S. Congresspeople, and avoid backlash among its users, and start offering some consistent messages about how it will deal with operating in China.

Given the time and attention this will take away from keeping the service appealing to the half-billion users it already has and managing an eventual public offering, China looks like a massive potential waste of time and money with a declining upside. But if they are absolutely determined, tomorrow I’ll have a list of what Facebook needs to do to improve their chances for success.

Mick

I agree with all your reasons, but there’s one reason why I think China might still go for Facebook – simply because it has the most people on it, worldwide. I’m a reluctant and infrequent user of Facebook – I think it is clunky and has too many intrusive features. If there was an alternative, I’d probably use it. However, I’m forced to use Facebook if I want to keep in touch with friends and family across the world. China may have more functional and localised social network sites, but they’re no good if your friends are not using them. People in the UK, Thailand and Canada don’t use Renren or QQ. So I think it all depends on whether Chinese people are happy to stay in their own separate pool, or whether they want to mix with the rest of the world.

David Wolf

Mick, you make a good point. Let me turn it around: the extent to which Facebook will succeed in China depends on the number of China’s internet users who want to keep in touch with non-Chinese friends and colleagues overseas. (Chinese family, friends and colleagues can and will use Renren, QQ, and Weibo.)

I cannot say how big that market is, but here is some food for thought: less than 1% of all Chinese mobile subscribers make use of international roaming. Can Facebook make a business on a market that size in China? On a market twice that size? Would it even be worth the investment? Would they even need to bother with a local site?

Anyway, all will become clear with time. Then we can start another round of this second-guessing.

Michael A. Robson

How come one of your points is that FB is too late (as evidenced by slow growth rates for FB-wannabes) and another one of your points is that the competition is too strong, and FB can’t survive?

How how can you fault FB for being ‘lame at mobile’ when the mobile version of Facebook.com is even better than the actual Facebook app? Are you seriously suggesting that Facebook has not been customized for mobile use? We’re about 4 years into the post-iPhone era, I think FB has cracked the ‘surfing the web on a phone’ thing..

Anyway, the arrogance with which you look down on Western Internet companies is pretty funny (number 4 and 5 are essentially the same thing) considering all of these companies are imitations of the real thing abroad. Facebook won’t be popular because of its ‘cachet’, it will be popular because it’s just plain better than the competition with cooler features, better engineers, and more users. It sounds like you’re trying to transplant Korean Nationalism onto Chinese people without their permission. Where are you getting this ‘pride’ from? You think Chinese people don’t realize all these ‘homegrown’ internet companies are just ripoffs of foreign ideas? Not exactly a noble pursuit.

There are about 400M internet users in China, a handful of whom use VPNs just to get on Facebook. Facebook is just an ad platform (like Google). That’s it. It’s a pretty simple business plan, and you’re betting against it? Awesome.

David Wolf

Thanks for your comment, Michael.

How come one of your points is that FB is too late (as evidenced by slow growth rates for FB-wannabes) and another one of your points is that the competition is too strong, and FB can’t survive?

If there was an opportunity for Facebook in China, it was probably 3-4 years ago. Today, the flock Facebook-wannabes have staked out what might have been Facebook’s core turf, plus the entire Facebook-style SNS experience is seeing its audience drained by competing experiences a la QQ and Weibo.

How how can you fault FB for being ‘lame at mobile’ when the mobile version of Facebook.com is even better than the actual Facebook app? Are you seriously suggesting that Facebook has not been customized for mobile use? We’re about 4 years into the post-iPhone era, I think FB has cracked the ‘surfing the web on a phone’ thing..

I’ll cop to not having used Facebook.com on mobile and to relying on apps, but if Facebook’s mobile apps still offer a disappointing experience four years after the introduction of the iPhone, can you stil say FB has cracked mobile? Oh, and, by the way, we’re 17 months into the tablet era, and still no iPad or Android 3 app.

Anyway, the arrogance with which you look down on Western Internet companies is pretty funny considering all of these companies are imitations of the real thing abroad.

If I came across as arrogant, I apologize. I think these companies do great things, are made up of smart people, and have amazing businesses. But I’ve spent the last 13 years watching – often at close range – these really smart companies fall to their imitators because of squandered opportunities and a failure to connect with Chinese netizens, and I’m frustrated that the smart guys aren’t bothering to learn the lessons this place wants to teach them.

Facebook won’t be popular because of its ‘cachet’, it will be popular because it’s just plain better than the competition with cooler features, better engineers, and more users.

Agree on your premises, not your conclusion. But we’ll just have to wait and see, won’t we?

You think Chinese people don’t realize all these ‘homegrown’ internet companies are just ripoffs of foreign ideas? Not exactly a noble pursuit.

Apparently, the Chinese people don’t care who ripped off whom. And to the point, business concepts aren’t proprietary IPR. Some of the best and biggest companies in the world have built their businesses on making incremental improvements to great ideas invented elsewhere. When you eat a Hershey bar, ride in a Ford, use a Mac or Windows PC, fly in an Airbus, etc, you are enjoying the fruits of “ripoffs.” Slow down a bit and look at what these local companies are doing that is different.

Facebook is just an ad platform (like Google). That’s it. It’s a pretty simple business plan, and you’re betting against it? Awesome.

A pretty simple business plan is a good thing, I’ll grant: I really wonder about Charles Chao’s plan to monetize Weibo based on six separate revenue streams. But a simple business plan is not enough for success in business. Just ask Larry Bossidy. Or Mies van der Rohe. Or, for that matter, ask the guys who wrote the simple China business plans for Yahoo!, Google, eBay, AOL, Warner Theaters, Jack-in-the-Box, Dunkin’ Donuts, etc. ad nauseum.

Between us, Michael, I hope Facebook proves me wrong. I hope they make me eat raw crow. But for the reasons Will, Gady, Bill, and I lay out, I don’t think it is going to happen.

Michael A. Robson

FYI, Renren is currently valued at 5Billion, good for them. Facebook, without giving up any directorial control/power (an IPO) has been estimated to be valued between $50-65B. If you just check out the photo editing, viewing, sharing integration, and things like Facebook Groupon and Facebook Messages (upcoming take on email), none of that stuff is happening on Renren. I just don’t think (as you mention, the low marketshare numbers) RR is that engaging. Furthermore, did RR build out a deep and rich advertising platform? I suspect not. After, why would they? All they had to do was look like duck, quack like a duck, etc. in China, to scoop up users.

My point is, there is actually a difference between the Real McCoy, and the fakes. If you want to say that Chinese Internet Companies are Innovative, great, let’s see it. If you want to say they’re ripoffs, fine, it wouldn’t be the first time, and it’s nothing to be ashamed of for a developing country, it happens all over the world. What I object to is when the Chinese Intelligencia get ahead of themselves by suggesting the Chinese Fakes ARE actually better than the real thing, that somehow a mediocre product will thrive because of China’s massive population. You shouldn’t be cheering for that! You shouldn’t be cheering for the worse product to succeed, because it means that YOU as a user LOSE.

And when IP gets ripped off left right an centre in China, it dissuades any Chinese nationals from persuing their own great new ideas (for fear of zero financial gain).

When the promos for the Facebook movie started leaking, they had (famously) 500 million users. By the time the movie was in theatres, and people were talking potential oscar winner (Jan 2011), it was revealed that actually FB had reached est. 600M users. This is what happens when you work on something that you care about, as opposed to ‘rip off something’ so you can sell it for a quick fortune. That is an insane growth rate (and apparently Renren has only 30M users).

“Some of the best and biggest companies in the world have built their businesses on making incremental improvements to great ideas invented elsewhere”

No one is accusing Chinese companies of ‘improving’ anything, they’re being accused of making cheaper, lower-quality versions, without paying royalties or lisence fees to the originator/owner of the idea. Wang Xing/Joseph Chen are no different, and is nothing to be ‘admired’ by young Chinese entrepreneurs. Chinese people deserve entrepreneurs/heroes that this.

David Wolf

Michael, you and I are in violent agreement on Renren. I think it is overrated and destined to fail, and the ratio of active users to total users is an indicator of its failure to go mainstream. We also agree that ripoffs and knockoffs are a poor substitute for innovation.

And while I agree that many of the local “fakes” aren’t worth the servers they’re housed on, suggesting that they’re all somehow objectively inferior to the sites that inspired them is an overstatement, if not hyperbole. QQ has done a brilliant job at adapting and updating chat long after the sites that inspired it have collapsed into irrelevance. We gave up on BBSs and Usenet-style online forums a decade ago, but sites in China have made them more dynamic than blogs. Youku is much more than just a YouTube knockoff: it is the seedling of an entertainment conglomerate. And Weibo, whatever its commercial prospects, has extended Twitter’s model to make it more conversational. Etcetera, ad nauseum.

Is Taobao worse than E-bay? How? Is AliPay inferior to PayPal? And why did Baidu hold three times Google’s market share at Google’s high point in China?

As to cheering on inferior products being a dumb thing, emotionally, as a geek, I agree.

But rationally, after reading The Innovator’s Dilemma and considering the market success Alternating Current over Direct Current, piston over Wankel, VHS over Betamax, Windows over MacOS, GSM over CDMA, and a dozen similar cases, I conclude that the most powerful enemy of “better” is not “best,”, but “good enough.” We can argue the virtues of the global innovators all we want. I think we need to understand better why imitators succeed over innovators rather than bemoan the success of the copycats and dismiss as fools the people who patronize them.